Saturday, April 11, 2015

Prime Minsiter tries to secure your retirement by pushing NPS

One more admirable initiative of Modi governemt is providing a Philip to New Pension Scheme or National Pension System. Additional tax rebate is proposed in budget'15 under section 80CCD for investment upto Rs.50000.00. 

I don’t think it will transform into a big corpus which will take care of retirement,but will help to create awareness for retirement planning.

The generation of whats app, flipkart, and pizza hut needs to understand that we are not provided by any assured retired benefit and have to accumulate our retirement fund on our own. So if you have not yet seriously given a thought to Retirement planning start atleast with NPS now..

Let’s understand some of the aspects of the schemes : 

  • What is the New Pension Scheme? 
  • How it works? 
  • What are Tier I and Tier II accounts in the NPS? 
  • What are the three categories in the NPS? 
  • Fees and Expenses related to the NPS? 
  • What is the minimum amount needed to invest in the NPS? 
  • What are the tax implications of NPS? 
  • How can I open a NPS account? 
  • Guarantee of returns under NPS?
  • Who will pay the pension?
What is the New Pension Scheme?

The NPS was introduced by the government to give people a way to get a pension during their old age. Employees of the government sector already get a pension, so this scheme was introduced as a social security measure that enables people from the unorganized sector to draw a pension as well.

The working mechanism is quite simple – you contribute a certain sum every month during your working years, which is then invested according to your preference. You can then withdraw the money when you retire i.e.60 years of age.

How it Works ?

You can enroll in the NPS at any time if you are a citizen of India and at least 18 years of age; no entry is, however, allowed after 60 years of age. You should take advantage of compounding of your wealth by starting right away.

The earlier you start, the greater will be the growth of your pension wealth.

Under NPS, how your money is invested will depend upon your own choice. NPS offers you a number of fund managers (six) and multiple investment options (three) to choose from. In case you do not want to exercise a choice as regards asset allocation, your money will be invested as per the “Auto Choice” option.

You can open an NPS account with authorized branches of service providers called ‘Points of Presence’ (POPs).

You have the option to shift from one branch to another branch of a POP at your convenience.

What are Tier I and Tier II accounts in the NPS?

Like any other pension NPS is meant to be a pension scheme, so the basic purpose of it is to give you a steady stream of income on your retirement.

Tier I and Tier II are two options under the scheme where you can invest your money, the primary difference between them is how they differ in allowing you to withdraw your money before retirement.

NPS Tier I

There is severe restriction on withdrawing your money before the age of 60, because it is necessary to invest 80% of your money in an annuity with Insurance Regulatory Development Authority (IRDA) if you withdraw before 60. You can keep the remaining 20% with you.

When you attain the age of 60, you have to invest at least 40% in an annuity with IRDA regd. Insurance co., the remaining can be withdrawn in lump-sum or in a phased manner.

Here are the details of how your money can be withdrawn in a NPS Tier I account.

When can a subscriber withdraw the amount

NPS Tier II Account

You need to have a Tier I account in order to open a Tier II account.

The Tier II account makes it easy for you to withdraw your money before retirement because there is no limit on the withdrawals you can make from the Tier II account.

You need to maintain a minimum balance of Rs. 2,000, and you can transfer money from the Tier II account to Tier I account, but not the other way around.

There is a Rs. 350 CRA (Credit Record Keeping Agency) charge which is not present in the Tier II account, but the rest of the fees remain the same.

Asset Allocation and Categories in the NPS

There is an Active Choice option, and an Auto Choice option. 

Active choice - In the Active Choice you can select how much of your money will be invested in the different classes with a cap of 50% in Class E (Equity).

Auto choice - Your money is invested in a certain percentage in the various classes based on your age. 

At the lowest age of entry (18years), 50% - E Class, 30% - C Class and 20% - G Class.These ratios of investment will remain fixed for all contributions until the participant reaches the age of 36. From age 36 onwards, the weight in “E” and“C” asset class will decrease annually and the weight in “G” class willincrease annually till it reaches 10% in “E”, 10% in “C” and 80% in “G”class at age 55.

Here are the three investment classes:

In either of these options you have to select the fund manager who will manage your fund. Choice of fund manages available is as follows:

ICICI Prudential Pension Funds Management Company Limited
IDFC Pension Fund Management Company Limited
Kotak Mahindra Pension Fund Limited
Reliance Capital Pension Fund Limited
SBI Pension Funds Private Limited
UTI Retirement Solutions Limited

Fees and Costs related to the NPS

There are some expenses associated with NPS list of which is as follows :

*Service tax and other levies, as applicable, will be levied as per the existing tax laws.

What is the minimum amount needed to invest in the NPS?

For a Tier I NPS account you need to contribute a minimum of Rs. 6,000 per year, and make at least 4 contributions in a year. The minimum amount per contribution can be Rs. 500.

Minimum amount for opening Tier II account is Rs. 1,000, minimum balance at the end of a year is Rs. 2,000, and you need to make at least 4 contributions in a year.

What are the tax implications of NPS?

Although you get tax rebate as per proposed tax laws, but withdrawals and pension would be taxed at marginal tax rate.

How can I open a NPS account?

You can open a NPS account by going to the bank branches of the banks that are authorized to sell this.

No Guarantee of returns under NPS?

It doesn’t guarantee you any assured returns , but as expenses are very low and due to professional management you can expect optimal returns.

Who will pay the pension?

Remember NPS will not pay you pension directly, but would offer you to choose and transfer your accumulated wealth to any of the insurance co. Registered with IRDA and offering immediate annuity products.

ABM View-

Keep in mind that NPS won’t pay you a pension directly, the rate of return is not fixed and a withdrawal as well as pension is taxable. But as expenses are very low it has capacity of generating good returns as per the class you are invested in. If you are a conservative investor falling in top tax bracket and have not planned for any other investments for retirement apart from EPF or PPF then should go for it.

Thursday, April 2, 2015

More reason to cheer for Proud Parents of a girl Child

Lakshmi is the Goddess of wealth, and it is believed that a girl child will bring prosperity and wealth to the family she is born in. 

Prime Minister Shri Narendra Modi also adds one reason to prove it. To show his commitment towards girl child and for the campaign “Beti Bachao, Beti Padhao” he has launched a scheme exclusively for a girl child named “Sukanya Samriddhi Yojana”.

I do not know the social outcome of the scheme, but for sure financially it is one of the best schemes for proud parents of a daughter.

Appending below Features of the scheme :

Salient Features of Sukanya Samriddhi Yojana

Who can open this account? - Parents or a legal guardian of a girl child who is 10 years of age or younger than that, can open this account in the name of the child. For initial operations of the scheme, one year grace period has been provided to make it 11 years of age. With this one year grace period in age, which is valid up to December 1, 2015, you can get this account opened for a girl child who is born between December 2, 2003 and December 1, 2004.

9.1% Tax-Free Rate of Interest - This scheme has been flagged off with a 9.1% rate of interest, higher than that of PPF which stands at 8.7%. But, this rate is not fixed at 9.1% for the whole tenure and is subject to a revision every financial year like all other small savings schemes, including PPF.

Prior to the budget announcement, 9.1% annual return seemed unattractive, but not anymore, as it has been made tax exempt now. Interest amount gets added to your balance amount in the account and compounded either monthly or annually, as per your choice. Monthly interest compounding will be done only on your balance amount on completed thousands.

Duration of the Scheme - The scheme will mature on completion of 21 years from the date of opening of the account. If the account is not closed on maturity after 21 years, the balance amount will continue to earn interest as specified for the scheme every year. In case the marriage of your daughter takes place before the maturity date i.e. completion of 21 years, the operation of this account will not be permitted beyond the date of her marriage and no interest will be payable beyond the date of marriage.

Deposit for 14 years only – Though the scheme has duration of 21 years, you are required to make contributions only for the first 14 years, after which you need not deposit any further amount and your account will keep earning the interest rate applicable for the remaining 7 years. 

Premature Closure - The account can also be closed prematurely as your daughter completes 18 years of age provided she gets married before the withdrawal. As the maximum permissible age of the girl child is set as 10 years, the scheme effectively carries a minimum duration of 8 years i.e. 18 years of exit age – 10 years of entry age.

Partial Withdrawal - It is also allowed to withdraw 50% of the balance standing at the end of the preceding financial year, but only after your daughter attains the age of 18 years. So, effectively it has a complete lock-in period of at least 8 years, before which you cannot take out any money for any purposes.

Minimum/Maximum Investment - You need to deposit a minimum of Rs. 1,000 in a financial year to keep your account active. Failure to do so will make your account inactive and it could be revived only after paying a penalty of Rs. 50 along with the minimum amount required to be deposited for that year, which currently stands at Rs. 1,000.

Also, you can invest a maximum of up to Rs. 1,50,000 in a financial year. You can make your contribution to this account in as many number of times as you like.

How many accounts can be opened? - You can open only one account in the name of one girl child and a maximum of two accounts in the name of two different children. However, you can open three accounts if you are blessed with twin girls on the second occasion or if the first birth itself results into three girl children.

Nomination Facility - Nomination facility is not available in this scheme. In an unfortunate event of the death of the girl child, the account will be closed immediately and the balance will be paid to the guardian of the account holder.

Documents Required - Birth Certificate of the girl child, along with the identity proof and residence proof of the guardian, are the mandatory documents required to open an account under this scheme. You can approach any post office or authorised branches of some of the commercial banks to get this account opened.

Sukanya Samriddhi Yojana vs. Public Provident Fund (PPF)

Budget 2015 has made this scheme quite attractive for the investors. If you are an investor who exhausts entire PPF limit by depositing Rs.150000 and want to save for your girl child’s marriage or higher education. Would recommend to first investing in this scheme and then to PPF, as this scheme provides you safe investment with much higher returns.

Real Life case study on Retirement Planning of one of my client in Times Dtd.13/01/2015

My Times of India Article Dated 30/12/2014 on "Time to take New Year Resolution"

My Times of India Article of 30/09/2014 on "Benefits of Diversification"

My Times of India Article 23/9/14 on "Goals and Risk Tolerance"